iBankCoin
Home / firehorsecaper (page 4)

firehorsecaper

Tokyo based, expat Cape Bretoner. Learning to live in a de-leveraging world. Better suited to the crusades. CFA & FRM charter holder. Disclaimer: @Firehorsecaper reminds investors to always perform their own due diligence on any investment, and to consult their own financial adviser or representative when warranted. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.

$CXW, $GEO REIT – DOJ THROWS AWAY THE KEY ON PRIVATE PRISONS

Yates_private prisons

images

Investors in listed private pension companies Corrections Corporation  of America (CXW), and The GEO Group, Inc. (GEO), got murdered yesterday. $CXW fell nearly $10 to close $17.57 (mkt cap $2.1bln), down 35% on the day, with $GEO closing down 40% to $19.50 (the smaller of the two, mkt cap $1.44bln).

Most articles published since that I have read focus on the morality issues, but IBC readers have their own steady compass on that front, the Peanut Gallery is here to guide your investment thinking and analysis when tape bombs like Deputy Attorney General Sally Yates memorandum to the Bureau of Prisons (BOP) hit the wire (link to actual letter at top of post). Amazon’s Washington Post broke the story that stated the US Justice Department plans to end the use of private prisons.

This is a big deal and should not be discounted as a driver of the valuation of these companies going forward. The Democrats have had this issue on their radar for some time. Obama has been keen to push reforms of the criminal justice system in the US, acknowledging the fact that the US incarcerates too many,almost 0.7% of the entire population (the “1%” nobody likes to talk or think about) with an undue weighting of African-American inmates (2.7% versus 0.5% for other races). It is clearly too late for “Obamabars” or whatever catchy reform slogan they might come up with, but Hillary is clearly ready to take the baton and she is not likely to miss the hand off. In her well publicized tweet of November 2015 Hillary tweeted, “We need to end private prisons.” The aforementioned prison outsourcing stocks were down 4-6% of the day of the tweet, but bounced back in the absence of immediate follow up. Enter Sally Yates.

images-1

The typical legacy contracts which granted private prison operators 20 year terms with 90% occupancy will be no more. More lucrative deal which were negotiated on a “set price” basis, irrespective of occupancy levels, will likely be re-negotiated.

The Bureau of Prisons (BOP) contracts for Federal prisons and have traditionally have up approximately 1/2 of the revenues for both $CXW and $GEO. State and Municipal contracts make up the remainder and while BOP’s directive will have sway going forward, the pace of contract roll-off will likely be measured due to tight budgets.

While only 8% of Federal prisoners are housed in private prisons, 62% of immigration detainees are housed in private facilities. Immigration & Customs Enforcement (ICE), a division of the Department of Homeland Security (DHS) are the ones that contract for immigration detainees. Immigration offenses now exceed drug offenses in absolute number and full 1/3 of all Federal criminal cases are immigration related.

Politicians, regardless of level of government, do not like having things blow up in their faces. When the US already spends 6x more on prisons than on education, cost containment will be key as BOP figure out the optimal way to respond to the clear DOJ directive (a 5 year run-off period has been assumed).

images

Private prisons are officially in the “sin” category along with tobacco, liquor, and casinos.

What to do. My focus will be on $CXW; Correction Corporation of America. For those, like myself, without current exposure to either name this is a time for study and analysis.

Brave analysts to comment thus far appear to be in the buy the dip (BTD) camp and appear to have a modest preference for $GEO over $CXW, speaking to the listed equity. Looking at the capital structure, $GEO has more debt, $2.23bln with Senior secured rated Ba3 and Senior Unsecured rated B1. CXW was upgraded by Moody’s to Baa3 in June 2015 and has $1.4bln in debt.

CXR 4.625% May 2023’s were not immune from the carnage of yesterday’s trade, falling from $102 to $85.50 (-16.2%) on the day. My expectation would be for the equity to rebound from the current levels and for the bonds to drift lower concurrently. The catalyst for a sharper move in the debt would be loss of investment grade rating by Moody’s. Assuming the debt is taken back (i.e. downgraded) to Ba2 (speculative grade) from investment grade there may be an opportunity to buy the debt ($70.00ish) on a hedged basis, shorting $CXR equity to the expected recovery rate on the bonds. As this opportunity unfolds, I would expect there would be cuts to the dividend on the common shares which would reduce the negative carry on the hedge.

The closest proxy I could come up with in analyzing private pension debt is military housing debt. To be clear, no analogy is to be drawn between criminals and brave service men and women that protect the nation, this is purely an asset valuation exercise. A large portion of the USA’s military housing has been privatized. The debt issued is not municipal debt, an important distinction, but is supported by the “Basic Allowance for Housing” (BAH) that is earmarked annually as an appropriation from the Federal budget by the Department of Defense (DOD), the world’s largest employer. On balance, the location of the private military housing complexes is favorable (something to think about as bases get slated for closure on occasion) to private prisons. Military housing has a much better alternate use as well, including civilian use and/or re-purposing.

The fix is in, it would appear. Private prisons will be as popular as a coal seam in the Appalachians. Trade accordingly. JCG

 

Comments »

GFC REMEMBRANCE – WE’VE COME A LONG WAY BABY

The U.S. Financial Crisis 2007-2008, The Global Financial Crisis (GFC for short) and the Great Recession 2008-2012 all seem to have become interchangable terms. I recently came across some journal notes I made at the peak of the crazy in 2008. The reason for the note timing was my thought was that we were going through an unprecedented time in financial history that would have clearly have a deleterious effect on the world at large. I had just read some diary excerpts from my great-great-grandmother Henrietta’s diary, written circa 1905-1908, which got me thinking I should get pen to paper in case this page of history was of interest in another 100 years.

4 September 2008

“Ruthless markets continue. Dow < 300, NASD < 65. Merrill Lynch has now taken write-downs equivalent to 25% of all of the money they have made since they came into existence.”

We all had little idea that we were in the relative early innings. The S&P which was at 1217 coming into September 2008 would eventually fall another 45%.

5 September 2008

“If you find a path with no obstacles, it probably does not lead to anywhere.”

10 September 2008

“What a week! Sunday the Fed took over Fannie and Freddie Mac. Monday the Dow was up 300. Tuesday Lehman was down 45% and the Dow off 300. No trending markets to report.”

11 September 2008

“9-11 anniversary overshadowed by carnage in the financial markets today. Lehman sub $4 (was $17 on Monday). It does not look good for them.”

15 September 2008

“One of the most dramatic days in the history of the financial markets. Lehman Bros. files for bankruptcy, Ch. 11 late Sunday. Bank of America bought Merrill Lynch for $29 (1.8x book) in an all stock deal. Merrill Lynch closed at $17 on Friday past. Lehman to zero, incl. the pref I bought as a punt (oops). The risk reward was very good.”

econ_04

17 September 2008

“This is getting comical, if it were not for the massive wealth destruction left in its wake. Last night the Fed took the reins of AIG, replacing management and taking an 80% stake in return for $85bln 2 year bridge loan at Libor + 8.5%. Wow. Yikes. Mommy.”

econ_11

8 October 2008

“Quite a gap in my notes due to a new level of fear in the global markets. A truly scary time for all. No country or company is being spared here. Very glad to have my health, and to be young (relatively).

28 October 2008

“The smashing of dreams is not over. A wild month with everything cut in 1/2, read down 50%. The only currencies trading up are USD and JPY. USD/CAD from parity to 1.30. Trying to remain positive.”

econ_06

Fast forward – 17 August 2016

The current relative lack of volatility in the financial markets, masked in large part to the continuing largesse of global central bankers, makes the perilous 2008-2009 lows seem further back in history than the scant 7+ years it has been. The 17-month equity bear market which ran from October 2007 – March 2009 resulted in a near 50% drawdown in the S&P, finally basing at an ominous 666 on March 6, 2009. The return over the ensuing 7.45 years to the present S&P level of 2178 is a 17.25% compounded annual return. Nobody knows where we go from here. The thumb on the scale from central banks makes traditional metrics all but useless in charting the future course. The financial outcome will likely come to be inextricably intertwined with geopolitical outcomes.

CqEgpecWIAA_uM4

NIRP has been a certified global failure. The banks are in triage. Only the Canadian and Australian banks trade > 1.0 book. Both Bank of America and Citi trade < .6x book and they are expensive compared to the European banks which are further behind in their capital raising efforts (DB price to book 0.26x). Global insurers are in the waiting room and feeling ill. A concerted move by the Fed, the ECB and the MoF to 1% would do a lot more to cure the ills of the global markets than to use the little remaining runway they have on the false hope of fighting the ogre of deflation in their theoretically walled nation(s).

Trading based on global interest rate differentials is poppycock as the hedging methodology for global fixed income is 100% clear. FX is ALWAYS hedged in foreign fixed income as the the vol of the fx moves dominate the vol of the underlying bond returns. Those thinking UST are a buy because Bunds or JGB’s are yielding negative need to give their head a shake and look at the empirical evidence.

This relatively recent phenomenon (on a 100 year time line) of allowing the non-profit maximizing players (i.e. central banks) to call the shots for a prolonged period will end in tears for all involved. JCG

 

Comments »

$CXRX CONCORDIA INTERNATIONAL CORP. – SHAREHOLDER ATTENTION DEFICIT DISORDER

images

$CXRX IPO January 3, 2014.

Concordia International, regarded as the Canadian little sister of Valeant, was taken to the mat in Friday’s trade after a disaster of a Q2 2016 earnings report. Including after hours action, a full 40% was taken off the market cap of $CXRX ($510mm now). A $0.04 earnings miss (“adjusted” earnings of $1.38 vs. $1.42, < 3%) does not normally elicit such revulsion, but in concert with horrendous un-adjusted (i.e. GAAP) numbers, reduced forward guidance, departure of the CFO, and abolition of the dividend, all that was missing was a crow’s foot from this steaming mess of a report.

The qtly GAAP loss was -$570.5mm (-11.18 per share), largey due to the write down in the value of Plaquenil and Nilandron, both of which are under assail from generic drug competitors.

Founder, Chairman & CEO Mark Thompson formerly worked at Biovail, before Valeant tucked them under their wing in 2010. Concordia has been highly acquisitive since their formation, spending $5bln since 2013 (Covis and AMCo being the largrest). The focus has been on buying legacy drugs (i.e. buying spent oranges and extracting more juice from them) and tweaking the pricing (i.e. not lower).

A great deal of debt was assumed to finance the aforementioned m&a binge. Total debt is $3.3bln. The benchmark (cusip EK849878) US$735mm 7% April 15, 2023 , issued in 2015 to finance the Covis aquisition, broke through $80.00 in Friday’s trade to settle in the high $70’s. I would expect the rating agencies to take action, now that the horse has left the barn, in the coming weeks. CCC, aka “fish hooks” are likely in the cards. Credit ratings are alphabetic, it should be kept in mind. A is good, C much less so and D stands for default. Expect analysts that have not yet suspended coverage to turn their attention to recovery rates. The base case recovery rate assumption on Concordia debt, in a tap out situation, will likely not have a 7 handle, as in 70 cents on the dollar.

There are many unknowns for equity holders. The trading range on $CXRX has been a wide $9.65 (Friday’s intraday low) to $89.10, sitting 88% below their all time high. The margin for error on execution going forward is very low. Jesus take the wheel. I’d give it a wide berth. JCG

Comments »

INCOME FUND – PIMCO FUNDS GLOBAL INVESTOR SERIES; $PIMCMEI.ID

All investors have been extremely challenged to select plausible investments for the fixed income portion of their investment portfolio in the current environment. With so much of the world sovereign bond markets trading at negative yields, it is certainly a perilous time to be a fixed income investor. Alternative fixed income and unconstrained funds are all the rage.

This brief article introduces PIMCO’s venerable offering which is a global multi-sector fixed income fund. PIMCMEI is an open ended fund, incorporated in Ireland. The fund seeks and delivers high current income, 4.06% monthly at present. The fund duration is a modest 3.1 years.

PIMCMEI is up 4.81% year to date in 2016, compared to 7.43% for the S&P. This return  comes with a lot less drama of course, as anyone long equities through February 2016 can attest.

The MER for the retail fund is high at 1.45%. PIMIX is the institutional version with a more modest MER of 0.45% but for $1,000,000 plus invested. The standard deviation of PIMIX is 2.81% and the Sharpe Ratio is a remarkable 2.01. The Sharpe ratio calc first subtracts the risk-free rate from portfolio return then divides the result by the standard deviation of the portfolio return. As a point of reference the S&P 3 year std. dev. is 11.23% and the 3 year Sharpe ratio is 1.02.

Pimco’s Daniel Ivascyn, CIO is the PM for the fund (est. 12/2012), assisted by Alfred Murata. Ivascyn, not yet 50, took over from aged Bill Gross as the “Bond King” at Pimco. The retail targeted PIMCMEI manages > $15bln and PIMIX has > $60bln in AUM.

I’m also long some of Gunlach’s Doubleline funds, but nowhere  near the scale.

Wealth managers like the consistent Pimco Income Fund returns and offer up to 4x leverage on investment in the fund at Libor +50/+75 depending on the size of the relationship one has.

Clearly this fund gets many things right. The brain trust at Pimco is substantial and all PM’s benefit from the rigorous Secular forum, run annually, which looks out 3-5 years. The sister Cyclical forum takes a 12-18 month view and between them have allowed Pimco to get to the carrot first,  in size.

For non-US investors, the PIMCMEI fund attracts no withholding tax and is not subject to US estate taxes given the Ireland domicile.

The fund fact sheet can give you a good window on where Pimco currently sees value. Weighting in high yield are low in comp to emerging markets. The highest weighting is in US mortgage backed securities at present.

Don’t write off fixed income just yet, you just have to dig.  JCG

Disclosure: Long PIMCMEI levered 1:1. Leverage to be reduced as 3 month Libor setting reaches 1% (mid 2017?).

Comments »

NINTENDO $NTDOY- MOBILE, THE SECOND COMING

Pokemon Go, get used to hearing a lot more about it.

Thus far the limited release, including the all critical USA market, has been record setting.

12205311_14686323133805_rId5

From a trading perspective, the pin action has been awe inspiring, but without the wide trading ranges one would expect of daily double digit gains in the stock price of Nintendo. Buys have been exceeding sells by a factor of 7:1 on some platforms over the last week. Lower left to upper right as Gartman would phrase it. Nintendo officially has game, mobile game.

The global roll out of Pokemon Go is underway. I’m reporting from Japan, home of Nintendo (ticker 7974 on the Tokyo Stock Exchange), where fans can’t wait to get access to the app and begin their frolicking. The Japan roll out appears to have been set coincident with the end of the rainy season in Japan. As an outdoor “augmented reality” experience, Pokemon Go is best launched without torrential rainfall, hence I expect a release date the last week of July. The rain spigot ceases like clockwork around the 20th of July in Japan. Expect take up rates on app downloads, usage, paid users, $1 pokeball sales and overall hype to pierce the giddy precedent set by the US market.

The opportunities for Nintendo to exploit their extensive catalogue of intellectual property is immense. Pokemon, developed in 1995 by Satoshi Tajiri was already raking in $2bln in revenue per annum for Nintendo. Generations of gamers know the sketch, keeping advertising cost down and hence margins high. Others have pointed to the immense retail deals that could result with global franchises keen to build a stable of pokemonsters to drive traffic and resulting $. Poketourism can’t be far behind, I kid you not.

nintendo-2

The many, including me, not yet long should study further for rational entry points. Shorting this rocket is not something characterized as an investment activity and should not be considered.

Nintendo has over $7bln on cash on their balance sheet and no debt. The previous high in the ADR’s was $78.50 in 2007 and there are 15% less shares outstanding now (held as Treasury stock by Nintendo, now the largest sole shareholder of Nintendo stock via timely buybacks at much lower levels).

The current $33.38 price for the ADR’s has come too fast, but it is difficult to fade this move for the multitude of reasons noted. Nintendo has a market cap of $32bln at present.

Pokemon Go was developed by Niantic Inc., a Google spin off which Nintendo holds a 32% stake in (yet another reason to own Alphabet too). One can bet there are many more augmented reality games in the wings. No gaming company has been more successful than Nintendo, who have brought 22 of the top 25 console games to market over the history of the gaming space.

The previous stock price pinnacle of JPY 75,000 (we closed at JPY 27,780 Friday last) was achieved when Nintendo’s Wii console took the market by storm, selling >100mm units. There are 2.5bln smartphones in use globally at present, and growing. Candy Crush has the record to date for smart phone penetration at 20% and it would appear Pokemon Go could easily exceed that metric. Those early to the story in January 2016 saw 3-4x upside for Nintendo shares. The recent spike of near 2x since the limited Pokemon Go launch clearly increases the risk for new holders, but it would appear a mobile gaming juggernaut has emerged in Nintendo.

For those that feel restricted trading only North American hours, the more liquid parent listing denominated in JPY, 7974.to is another option for those enabled to trade on foreign exchanges. Any medium to long term hold would be best currency hedged, as even though the JPY has rallied 15%+ at points in 2016 seems destined to depreciate versus the USD.

Play safe and trade safer. JCG

PS: Follow me  on twitter, Caleb Gibbons @firehorsecaper

Comments »

United Kingdom 2.0 – Installation Unsuccessful

FB_IMG_1466758529094 (1)

Note: Problems at the Channel Tunnel

#Brexit caught many off guard, including yours truly. Tilted toward European equities going in and even chopped around long GBP versus USD as the referendum results cascaded in (tight stops, thankfully).

I have read that the referendum was taken with as much seriousness as an opinion poll, but clearly the real life effects have had the finality of triggering a guillotine. The head has been severed and is “in motion’. A brief respite at 1.37 has given way to 1.32 versus the Greenback.

At US$2.9tln, the UK is the World’s 9th largest economy and the 2nd largest in the EU, but clearly not for long. The UK accounts for 4% of global GDP which to put it in context is almost 2 Canada’s (1.8x rounded).

78% of the UK economy is service driven, on par with the US economy. London is the largest financial centre globally, followed by New York, Singapore, Hong Kong and Tokyo.

In terms of financial market importance, some have drawn parallels to German re-unification in 1990. At that time, there was talk of London losing some financial centre dominance in favour of a Paris, Frankfurt, London triangle. Such fanciful plans never came to fruition. On this go around, the spoils could be strewn further afield, think Dublin, Zurich, Luxembourg, Hong Kong, Singapore, Bangkok and Mumbai.

#Grexit was enough to upset the EU yogurt cart previously (US$220mm GDP). #Brexit, scaled by GDP, is 12x larger.

The Fly was all over the UK S&P downgrade story this afternoon before I could get my wonky vaca wifi to cooperate and it was laid bare, a 2 notch downgrade to AA, remaining on negative outlook. Fitch, the Sanders of the rating agencies, also downgraded post close today by 1 notch.

Value has yet to emerge in global equities. Higher than usual cash balances should be employed in such a treacherous market environment. Think capital preservation. Clearly the baby is being thrown out with the bath water is some sectors, and values will emerge.

I’m keeping a watchful eye on $ING equity, down 20% since last Wednesday (versus -40% for RBS equity). $ING Exodus stats again signals at threshold for both tech and hybrid OS. A 7% handle on dividend yield served as a good threshold for buys coming out of the global financial crisis in comparable globally safe banks (dominated then as now by the Aussie and Canadians).

USD/JPY is a decent barometer of the patient’s risk appetite and we probably need a clear break above 105 over the next week to signal anything near “all clear”. JCG

Comments »

$ICPT : INTERCEPT PHARMACEUTICALS, INC., – BIDDING PADDLES READY

Intercept Pharmaceuticals, Inc., waiting until almost midnight, the Friday before the Memorial Day long weekend, 5/27/16, announced the FDA approved Ocaliva (Obeticholic Acid) for the treatment of the liver disease PBC (primary biliary cholangitis), formerly known as primary biliary cirrhosis. Approval was largely expected (the FDA Advisory Committee had previously voted 17-0 in favour), but the good news appears to be that the conditions attached to the approval are modest. Safety concerns had some worried that sales could be hampered by restrictions on use in patients with moderate or severe hepactic impairment, but the prescription label has no such restrictions from my reading of it (link for your perusal): ocaliva_pi

PBC is a rare, autoimmune cholestatic liver disease that puts patients at risk for life-threatening complications. PBC is primarily a disease of women, afflicting approximately one in 1,000 women over the age of 40.

Sales of OCA will begin In 7-10 days and expectations are that peak sales could reach $2.6 billion per annum. $ICPT closed Friday at $141.77 with a market cap of $3.5bln. With a typical valuation of 7x sales, clearly there is scope for a rally from here. ICPT’s float is small at 17.44mm shares and 3.4mm shares (19.5%) are held short. 78.5% of the shares are held by institutions. Fidelity Investments is the largest holder with almost 15%. The lifetime high for the stock was $462.26, which will not likely be eclipsed until OCA for NASH (fatty liver) is approved in early 2019, which obviously depends of the results of the 2,000+ patient Phase III global trial.

Another likely scenario is an approach from a larger player seeking a blockbuster drug to add to their stable. With OCA approved for PBC there is now a risk buffer to await the 2018 outcome of the phase 3 “Regenerate” trial for OCA in the treatment of NASH. Nonalcoholic steatohepatitis (NASH) is a significant metabolic form of chronic liver disease in adults and children effects a much larger percentage of the population that PBC. The OCA dosage for the treatment of PBC are 5-10mg whereas for NASH the trial is being conducted at dosages of 10 and 25mg. There are currently no drugs approved for the treatment of NASH and OCA for PBC is the first liver drug approval granted in the last 20 years. PBC & NASH are distinct, progressive liver diseases. Both diseases may lead to fibrosis and cirrhosis of the liver. From a valuation perspective most would argue 20% to the PBC application of OCA and 80% to the much larger NASH opportunity.

XBI the SPDR S&P Biotech ETF is -26% ytd in 2016. ICPT is the 4th biggest holding in the ETF at 2.6%.

What lies ahead:

Next week analysts will be tweaking their ICPT numbers based on the terms of the OCA for PBC approval. Most recently MS moved to underweight with a price target of $80. Stingy indeed when ICPT have > $22 a share in cash on their balance sheet! Merrill Lynch have an underperform on the stock and a $144 target. ML used to be the biggest bull on ICPT, with a target > $800 per share when Rachel McMinn Ph. D covered them, before joining Intercept Pharma as Chief Business & Strategy Officer in April 2014.

The street conjecture will also begin as to the timing of a bid and take-out premium likely on a bid for ICPT, now that a level of uncertainly has been removed. JCG

Disclosure: Long ICPT, 3% weighting, trailing stops, not inclined to sell < $200.

Comments »

iCAR – NAV SET FOR $AAPL DEAD END

I for one think that Apple entering the automobile business is a very bad decision. Road & Track’s rendering looks like a Citroen and we know the lumps the French have taken on that misventure over the years. It has been reported this week that Apple has spent $4.7bln on automotive technology R&D over the 2011-2015 period, nearly 25x what incumbents (i.e. actual car companies) have spent on R&D, in aggregate, over the same period ($192mm). Apple’s “Project Titan” (the name of Nissan’s capable truck offering) is said to target having 1,800 employee by 2019. A car could come out at the other end by 2021. We will be on iPhone double digits by then (skip 13?), and shareholders will likely be highly fatigued by this farcical endeavor.

As per trusty Exodus, AAPL’s P/E stands at 11.2x. The average diversified electronics P/E is 20x, tech 22.2x, and overall market 20.6x. Ford, king of trucks with their best selling F-150 and global offerings like the Focus could not even make a go of it in Japan. Ford’s P/E is 6.23x, autos aggregate 10.2x, consumer goods 22.1x. The only car company to not totally step in it this year between emission scandals, recalls (airbags, etc.) and the like is Fiat Chrysler (FCAU, P/E 13.1x) who successfully spun out Ferrari (RACE, P/E 23.26x), tagging it with a portion of the parent debt as well. This was textbook creation of shareholder value, boosting the P/E of a niche, premium priced brand to elevate the P/E to one in line with a consumer goods P/E with a 22 handle.

Morgan Stanley gushed about Apple’s prospects in the car business this week in a research report, estimating an eventual 16% market share. What a lark; GM’s share is 17.7%, Ford 14.5%, Toyota 14%, Fiat Chrysler 13.2%, Honda 9.2% and Nissan 8.5%. Apple would need a best selling truck for the US market to get a sniff at a 5% share overall. They would need an EconoBox for Japan (who have the Nissan Leaf). They would need a budget, tank like SUV for the Chinese market where commuters increasingly fear death in any mechanized chariot weighing less than 5,000+ lbs (Great Wall SUV below). They would need affordable bling for the India market, one of the fastest growing automobile markets in the world (charging stations an issue). Finally, might as well throw in an estate version for Continental Europe.

Great Wall Motors is a domestic producer in China and is China’s largest manufacturer of SUVs and pick-ups (X Series pictured below). An interesting fact in terms of quality control is that they have the front doors (deemed the highest wear and tear item) made in Thailand by in plants entirely staffed by women. The doors are then sent back to China for final vehicle assembly. Their trucks sell well in markets like Australia as well where even with onerous import duties you can be “on the road” for under US$18,000 (kangaroo catcher grill is an aftermarket item, non OEM).

e-1

Nearly 30% of the oil demand in the US is driven by commuting (gasoline), with most drivers solo passengers. We need another $75,000 greenfield electric car like we need Trump as leader of the free world. Mass transit like China’s proposed 1,200 passenger Hoverbus makes a lot more sense. Driverless cars is another joke, a car is not a wearable and most have less than no interest. Autopilot transport truck trials in Europe are promising where road safety for other drivers is increased, along with improved fuel economy when travelling as a convoy.

CjS9LtYWEAEWpdo

Apple sticking to their core strengths is a highly preferred strategy, along with a return of capital to shareholders, by way of a special/extraordinary dividend. Apple’s cash hoard has been covered to death in the press, with the bulk of it is held offshore, not having felt the effects of the 35% tithe of the US Internal Revenue Service, yet. Domestic US cash generation has not been able to keep up with the outflows from programs like their $50bln stock buyback plan and the dividend increases activist investors have been able to cajole management into committing to. Apple now has $50bln in debt. Apple, already the largest sole taxpayer in the US at $10bln would owe an additional $23bln+ if they brought the overseas cash home to Cupertino, CA home spaceship base.

maxresdefault

CjQRYyvUYAA2LZh

My April blog on the spike to come in copper due to the growth in “renewables”was echoed by BHP this week. This Apple news, should it come to fruition, adds more demand to the equation.

For those that missed it: http://ibankcoin.com/firehorsecaper/2016/04/23/lithium-vs-copper-basis-trade/

Carl Ichan recently sold his entire Apple stake after holding for a period of 3 years, an active 3 years for Carl, in terms of shareholder activism. Worries about Apple’s relationship with China was his main gripe in jettisoning the full position. Soon after, Apple cut a $1bln check to invest in Chinese cab hailing UBER rival Didi Chuxing, to help Apple better understand the critical Chinese market. Surely China education can be secured more prudently, hopefully they do not serve up a Dud-i instead. Pre-IPO Apple took a paltry $3,600,000 of VC funding. Quite in contrast to the latest $1.8billion round by Snapchat, valuing them at $20bln.

Other punters, including Warren Buffett’s Berkshire Hathaway have been the cupped hands, investing approx. $1bln on the most recent AAPL stock swoon (some sources reporting at prices in the $109 area, other surmising in the $90’s). Just yesterday block buys were evident, 12.5mm shares across 2 trades for a cool $1.25bln as AAPL stock re-took $100 to close $100.41.

Apple should return excess liquidity to shareholders, when feasible from a taxation perspective, and let them invest where they see fit. Any by the way, how about fixing iTunes too. JCG

Follow me on Twitter. Caleb Gibbons @firehorsecaper

 

Comments »

DELL SECURED DEBT – $20BLN 6 TRANCHE – DUDE, YOUR DELL IS ON CLOUD #9

You don’t hear nearly as much about Dell anymore. Going private has that effect and that is what Michael Dell executed in 2013, along with partner Silver Lake who own approx. 25%.

Shaky debt markets argued for patience from the leads (BAML, BARC, C, CS, GS & JPM), but time was likely getting tight for Dell to raise the debt portion of the funding for their Oct. 2015 purchase of data storage firm EMC. Hybrid cloud, Dell is back baby.

In the end, the bond deal sold like hot cakes. Structured as a secured deal, with a 1st lien on certain company assets, the rating will be Baa3/BBB-, investment grade, just. On loss of investment grade, Dell agreed to spread “kickers” of 25bp per notch up to 200bp to allay investor concerns that the cloud they have hitched themselves to might be too Icarus like, in term of proximity to the sun.

At 20 yards this is a big deal, the 4th largest corporate bond ever (combined debt for Dell now just shy of $50bln) and the 2nd largest for 2015, overtaking Apple’s & Exxon’s $12bln deals to leave only AB InBev’s $46bln in #1 spot. The order booked topped out at $87bln for an upsized $20bln of bonds ($16bln initial size target, included an FRN which was subsequently dropped).

$3.75bln Dell (Baa3/BBB-) 3 year Fixed at US Teasuries (UST) +250bp, $4.5bln 5yr fixed @ UST +312.50, $3.75bln 7yr fixed @ UST +387.5, $4.5bln 10yr @ UST +425, $1.5bln 20yr @ UST +550, $2.0bln 30yr @ UST +575.

With the 30 year UST yielding 2.60% this makes the all-in yield on the longest and hence priciest tranche 8.35%, as long as the Baa3/BBB- rating are maintained.

Unsecured there were thought that Dell would have to pay 10-11% only a couple of short months ago, at the worst of it for credit spread, when BBB spreads were treble what they are today. Timing, check. Financial alchemy, indeed. Far out.

The structuring flexibility of being a private entity is likely to elicit some jealousy from certain gas & oil and pharma/biotech names. M&A for public entities is having a tough year with many pairing left at the altar or annulled . Going private is likely to become a much more popular avenue to creating shareholder value. As the stock of listed equity is reduced there is obviously less of it, all things being equal, causing priced to rise. The natural order of things, positive, normal, upward sloping. Gauge, and position, yourselves accordingly. JCG

 

Comments »

DROP THAT KITTY DOWN LOW – PUT ON YOUR RALLY BOOTS

ext

Note: Now that is a selfie; risk aversion in Europe is low, apparently…more Dom Perignon svp, aviation garcon.

The contrarian in me is keeping an even keel and a steady hand on the wheel, longer of equities than I have been for some time. Europe weighted, mind you (unhedged as to currency, at least for now). The same twitchy feeling that prompted me to go  long of gold miners in late November 2015. The key is to let the winners run,which I’ll give myself a B- on (+34% before switching to European equities mid February 2016).

On the bond side, the US remains a global “high yielder” with the 10 year UST at a 1.76% yield. A slowing pace of Treasury Bond issuance, coupled with budget surpluses, should allow rates to remain “contained”. Equity markets do not normally “turn tail” until 18 months after the 1st rate hike by the Fed and unlike former business cycles where the pace of rate hikes was underestimated by Fed Fund futures, most expect a more measured withdrawal from the methadone clinic this time around, with the potential for monetary “throttle steer”, where rates are potentially eased within a longer, flatter tightening cycle. The US 2-10’s curve is clearly flattening, but not by an absurd amount in relation to the modest absolute anchor rate levels in both maturities.

2e25ae4f-be51-40b7-9154-bc67e5a833af

The big boogie men worrying global investors are more ,”in the tails”, than the market is giving them credit for, in my view:

Brexit is far from a coin toss, 70/30 worst case, in favour of  the stay camp. From a statistics perspective on a 1-tailed basis (i.e. measuring on the negative outcome tail only, exit the EU), Brexit has a 0.15% “level of significance”. Not to be ignored, but not to be all consuming, West Ham bus incident negative either.

Ditto outcome and math for Trumpanasia, more feared than Zika across the land. Not a likely event that Trump gets beyond the GOP nomination in my view (non-voter, pure armchair view). Hillary looks largely unbeatable, despite the theatrics playing out on your TV.

China. Large, complex, multi-variate. A US$10 trillion dollar economy (2nd largest globally) is far from a 1 trick pony. The US Dollar’s viagra wore off just long enough for the Yuan to regain it’s footing and for the pace of Chinese fx reserve depletion to be curtailed. Time, and time alone, can cure many ills. A 2016 China hard landing is all but off the table.

I see in my crystal ball 2,250 at 2016 year end, with the S&P underperforming other major global indices, save Japan (ex Japan Mothers Index which will outperform). Soros (85), reducing his fund’s equity beta by 37% via S&P puts (on China fears) makes me even more convinced that we rally from here.

Pharma is a strong candidate lead from here in the high beta category. Financials seem destined to lag, still recovering from both gout and the food poisoning inflicted by their governors. JCG

Comments »